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The Internal Revenue Service Aug. 27 said certain vehicles created by the government to help balance the economy as part of its Public-Private Investment Program generally will not be considered taxable mortgage pools under tax code Section 7701.

In Revenue Procedure 2009-38, the agency said it would offer that treatment to Public-Private Investment Funds, put in place by the Treasury Department to restore the orderly functioning of financial markets, and to some related entities.

In general, the funds are designed to acquire commercial mortgage-backed securities and certain non-agency residential mortgage-backed securities, and then to issue debt secured by those assets.

Practitioner Praises Guidance.

Steven M. Rosenthal, a practitioner with Ropes & Gray LLP, Washington, D.C., said the government's decision to exclude these funds from the rules on taxable mortgage pools is praiseworthy.

"In today's environment, Treasury wants to encourage more vehicles to acquire troubled mortgages and to issue interests to investors, so suspending the TMP rules in these situations makes sense, at least from an economic policy perspective," Rosenthal told BNA.

IRS stressed that no inference should be drawn about similar consequences "if a particular structure or transaction falls outside the limited scope of this revenue procedure."

Under the program created by the government, Public-Private Investment Funds contain securities issued prior to 2009 that were originally rated AAA, collectively known as legacy securities.

Legacy Securities Key Issue.

IRS said the revenue procedure applies to any fund, or any portion of a fund, that holds legacy securities pursuant to the program, provided the U.S. government owns a significant equity interest in the fund.

It also applies, IRS said, to any entity as long as substantially all of its assets are equity interests in such a fund. However, the agency said, in making this determination, it will not consider U.S. government securities held by a regulated investment company, a real estate investment trust, or a portion thereof to fund income distribution requirements contained in tax code Sections 852(a)(1), 857(a)(1), 860, 4981, and 4882.

Taxable Mortgage Pools Described.

By way of background, IRS noted that a taxable mortgage pool (TMP)must pay tax as a corporation. In general, a TMP is any entity, other than a real estate mortgage investment conduit that meets the following qualifications:

. substantially all of its assets consist of debt obligations and more than 50 percent of these are real estate mortgages,

. the entity has issued its own debt obligations with two or more maturities, and

. the payments the entity makes as a debtor are related to the payments the entity receives as a creditor.

Rosenthal told BNA that Congress adopted the TMP rules when it created the REMIC regime, which is designed for mortgage pools. He said Congress wanted to make REMICs the exclusive means to issue multiclass interests in mortgages, and to discourage other vehicles.

"REMICs are useful for many occasions, but are somewhat inflexible,"he said.

Rev. Proc. 2009-38 will be in Internal Revenue Bulletin 2009-37 on Sept. 14.

The IRS's high hopes for streamlining the process for submission and approval of requests for accounting method changes is on hold for the time being, having succumbed to a variety of pressures, according to interviews conducted by Tax Analysts with several practitioners.

In determining how to handle change in accounting method (CAM) requests, the main tension for the IRS has been between the desire to streamline the process and the possibility that doing so would allow taxpayers to receive consent for impermissible methods of which the Service is unaware.

In Notice 2007-88, the IRS proposed adopting a more liberal regime of allowing automatic changes for accounting methods, starting with a pilot program. But that effort is now dead, a government official confirmed, and has been viewed internally as such for several months.

In an e-mailed statement to Tax Analysts, the IRS acknowledged the initiative's demise, saying a decision had been made not to move forward on the principles outlined in Notice 2007-88. "After considering responses from stakeholders, the IRS is no longer pursuing the pilot program," the statement said.

Automatic Consent and Uncertainty

For years taxpayers have been frustrated with the IRS's process for handling CAM requests made on Form 3115, "Application for Change in Accounting Method," an outgrowth of the section 446 requirement that the commissioner consent to all method changes. IRS employees in the Office of Associate Chief Counsel (Income Tax and Accounting) are tasked with reviewing Forms 3115.

To more efficiently manage the incoming CAMs, the Service has over the years adopted procedures that make some routine and noncontroversial method switches automatic. Yet according to a 2008 Treasury Inspector General for Tax Administration report, Income Tax and Accounting in fiscal 2006 "spent 34 percent of its direct time on the CAM program," while spending only 15 percent "developing published guidance." (For the TIGTA report, see Doc 2008-12661 or 2008 TNT 112-24.)

What the IRS proposed in Notice 2007-88 was to essentially flip the system for requesting accounting method changes to a regime of automatic consent unless an explicit carveout applied. Whereas Rev. Proc. 2002-9 (and guidance modifying it) spelled out which accounting methods were routine enough to permit automatic consent, the notice called for a two-track model in which taxpayers could make "standard" consent requests for any method -- which would be deemed automatic -- unless the IRS limited change to a particular method considered nonautomatic to be made under "specific" consent. (For Notice 2007-88, 2007-46 IRB 993, see Doc 2007-23471 or 2007 TNT 204-7. For Rev. Proc. 2002-9, 2002-1 C.B. 327, see Doc 2002-555 or 2002 TNT 5-9.)

At the time of the notice's release, the Service said the expected switch served "broad policy aims," such as speeding up processing of Form 3115 CAM requests. The notice would also have made changes to the extent taxpayers could get audit and ruling protection as a result of the CAM requests, as well as the timing of filed requests. (For prior analysis, see Doc 2007-7248 or 2007 TNT 59-4.)

Reaction to Notice 2007-88 was mixed, although heavier on the negative side. The American Institute of Certified Public Accountants expressed concern that the proposal would restrict taxpayers from making ruling requests in situations in which certainty was desired because of the mandatory nature of the expanded automatic consent process. Also, the Service's newly expressed standard of rejection of incomplete Forms 3115 was called "unrealistic and unduly harsh" by the AICPA. (For the letter, see Doc 2008-2485 or 2008 TNT 25-34.)

The AICPA also argued that the Service's proposed implementation of greater automatic changes would increase the involvement of the exam function, leading to several new problems. For one, the accounting firms pointed to a possible loss of uniformity. Also, firms said the injection of more uncertainty into the process was counter to the goals of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes."

The need for certainty would lead taxpayers to substantially increase the number of ruling requests made, further straining the IRS's resources, the AICPA said. "Taxpayers will want both audit and ruling protection of the type now afforded by an advance consent accounting method change request."

The American Bar Association Section of Taxation supported the basic premise of the notice but asked for certain modifications, such as providing a limited window for taxpayers to cure incomplete submissions and shifting the window periods for taxpayers under examination. (For the letter, see Doc 2008-15614 or 2008 TNT 138-21.)

IRSAuthority Questioned

One aspect of the government's reform efforts that could have contributed to the program's eventual dismissal was the question regarding the administrative authority to pursue significantly expanded automation. No one really questioned the IRS's authority to introduce limited automation procedures several decades ago, despite the authority not being explicitly granted in section 446. Creating an automatic-by-default regime, however, had some in the tax community worried about contravening Congress's intent of requiring the IRS to approve all accounting method changes.

In its 2008 report, TIGTA questioned the IRS's authority for making such a broad sweep -- though it was not the only entity to do so -- and highlighted that uncertainty as one of several perceived deficiencies with the proposal.

The notice's other possible flaws mentioned in the report included insufficient details on the level of review chief counsel would perform under the new consent process and the need for postconsent review as a backstop to detect taxpayers making "inappropriate use of the automatic consent process."

TIGTA ended up not taking an express position on the authority issue but hinted heavily at the uncertainty posed by the failure of the IRS to "clearly address the legality" of the move. Other comments submitted regarding the notice reiterated those concerns in stronger language.

Power Struggle

In the absence of clear statements by the government as to what drove the decision to abandon the streamlining plan, practitioners were eager to provide their own frank assessments of what took place behind the scenes.

While some groups voiced strong objections to the notice's proposal, indications are that one of the largest factors that doomed the project was internal government disagreement, according to one practitioner who wished to remain anonymous because of the sensitivity of the remarks. "It became an intramural dispute over who was to do the work" of reviewing the change requests, the practitioner said.

Other tax insiders, who also did not wish to be identified, laid part of the blame for the IRS about-face on intense pushback by accounting firms seeking to maintain clients.

Robert M. Brown, a retired KPMG LLP tax partner and former IRS associate chief counsel (income tax and accounting), said that "there clearly needs to be some efficiencies put into the system, for both the government and taxpayers." The Service should become more focused on economically reviewing method change requests at a sufficiently detailed level while pushing taxpayers to provide enough information to avoid playing games, he said.

In general, the current system of reviewing change requests began 10 to 15 years ago, Brown said, around the time that the IRS started permitting more method changes to become automatic. Since then there has been less internal emphasis on spending time on accounting method changes and it became a lower priority, leading to the numerous complaints raised today, he said.

There is a popular misconception that accountants should be reviewing consent requests as a means to speed up the process, Brown said. Chief counsel attorneys are probably better equipped to analyze Forms 3115, he said, although others could perform the function as well. For example, the Large and Midsize Business Division could set up its own review group, Brown suggested.

Leslie Schneider of Ivins, Phillips & Barker said it will likely be some time before another attempt at CAM reform is initiated. "It will take a while to regroup, and all the objections to reform are still here," he said. And as the IRS turns its focus to updating the revenue procedures granting automatic consent, most of the controversial methods will "continue to be left off the list," Schneider said. Meanwhile, most taxpayers will continue to push for greater review by the National Office to establish more definitive answers rather than be left with uncertainty created by field examinations, he said.

Public Disclosure?

One measure suggested as a means to provide taxpayers with more certainty about method changes in the current system is public disclosure of advance consent letters.

Section 6110(g)(5)(B)(iii) states that the IRS is not required to release consent rulings as written determinations rendered by chief counsel. And the IRS has so far chosen not to disclose them.

Although an advance consent request is done through a form, it is still a private letter ruling request, Brown said. He expressed support for making CAM consents public and "written with more facts and analysis, like those provided in a letter ruling," noting that consent letters are "very cryptic." The benefit of disclosure is ensuring equal treatment of taxpayers and "knowing what the IRS is ruling on," he said.

Regarding making advance consent rulings public, Schneider said doing so had both an upside and a downside. Making consents public helps taxpayers in knowing the treatment other companies are receiving from the government, he said. But disclosure may increase the rigidity of the process. "The IRS may be even more careful about what they say in a public consent," he said, thus limiting any usefulness.

Return to Status Quo?

With the notice now dead, what are taxpayers left with? Practitioners said the decision's impact will undoubtedly be reflected in the Service's 2009-10 priority guidance plan, with a return to projects to update Rev. Proc. 2002-9, perhaps with the goal of adding more designated methods as receiving automatic consent. That view was bolstered when the IRS issued Rev. Proc. 2009-32 on August 27, adding new methods to the list of qualifying automatic consents and clarifying the change request process. (For related coverage, see Doc 2009-19344. For Rev. Proc. 2009-39, 2009-38 IRB 1, see Doc 2009-19322.)

The AICPA offered its own solutions by outlining a two-track method taxpayers could use to request advance consents. The accounting group suggested that by largely keeping the present system, taxpayers could either submit a detailed request similar to one for a letter ruling that would provide audit and ruling protection regarding both the propriety of the proposed method and application to particular transactions, or they could submit a less detailed request application but in return receive audit and ruling protection regarding only a method's propriety.

"The biggest obstacle to reform is the will to do it," Brown said, noting that if the chief counsel, his deputy, or the associate chief counsel really wanted to change the process, it would happen. "No question, it can be done."

Those opposed to reform seem to have won the day for now. But one practitioner said there is always the possibility to "effectuate a lot of the same result another way." By making more and more -- if not all known -- method changes automatic, on a method-by-method basis and in conjunction with instituting a quick, cursory review of CAM requests to approve them, the IRS can achieve essentially the same goal without implementing the notice and leave it to the field to worry about, the practitioner said.

The government is willing to provide an $8,000 tax credit to most first-time home buyers, but those who want to claim the valuable tax break need to ensure that they meet all of the Internal Revenue Service's requirements first.

Q. My mother passed away earlier this year and I inherited her longtime home. Because I have never owned a house before, am I eligible for the $8,000 "first-time buyer" tax credit that you recently wrote about?

A. Sorry, but the answer is no. Rules of the new federal tax-credit program specifically prohibit consumers who inherit a property from claiming the credit, even if they have never owned a home before.

The credit is available to most buyers who purchase a house before Dec. 1, provided that neither they nor their spouse has owned a home for the past three years. The credit, however, is not available to single tax-filers who make more than $95,000 per year - even if they meet the three-year requirement - or to married couples who file their taxes jointly and whose adjusted gross income is more than $170,000.

The popularity of the new tax credit program has helped to spur home sales but, unfortunately, is also drawing keen interest from the Internal Revenue Service. The IRS is now scrutinizing claims for the credit, even if the tax return or claim is filed by an accountant or similar professional.

Case in point: Just a few weeks ago, a tax preparer in Florida entered a guilty plea on charges that he fraudulently submitted claims for the credit on behalf of 15 different clients. Most of them said they didn't understand the details of the program, but that they trusted the tax preparer to take care of it.

The accountant has been sentenced to three years in jail. His clients, meantime, can expect an audit letter from the IRS.

It's also important to note that you are not eligible for the credit if you purchase a home from someone whom the IRS deems a "related person" - including a spouse, parents, grandparents or your own offspring. Ditto for those who buy a house from a business or corporation in which they have at least a 51 percent stake, a small but fast-growing type of plan that can sometimes save buyers thousands of dollars in property taxes and reduce potential taxes on a resale.

Buyers who use state-sponsored bond programs that provide down-payment assistance or low-rate mortgages also usually are prohibited from taking the tax credit. That's because the IRS figures that buyers who use such programs are benefiting enough from taxpayer funds, so they shouldn't get a second or third tax break by also claiming the $8,000 federal credit for first-time purchasers.

Q. We have been thinking about selling our home and using part of our profit to buy a retirement home in a rural area. A seller in an area we like recently advertised that his property includes two acres of "airable" land. What does this term mean? I tried to look it up in the dictionary, but couldn't find it.

A. I get this question surprisingly often, perhaps because more people are reaching retirement age and selling their longtime home in urban or suburban areas and then using some of their resale profit to purchase a home in less-expensive rural communities.

Regardless of why you are planning to move, you couldn't find the term in your dictionary because the correct spelling is "arable."

An arable parcel is land that can be cultivated for farming. If you really want the place, be prepared to put on some overalls and buy a tractor - or at least a large shovel.

Q. I have a credit score of about 770, which FICO considers "good." I would like to buy my first home soon, but I am in the middle of a dispute with an auto dealership that sold me a "lemon" back in April. I made all my payments promptly until I returned the car to the dealer in July and demanded my initial deposit back. The dealer refused, and now says the company will turn over my account to a collection agency and report me to the credit bureaus if I don't pay an additional $625 in back payments and a $1,000 return fee within 15 days. If I refuse to pay, how will it impact my credit score and my ability to purchase a house?

A. Your credit score will undoubtedly drop if the auto dealer follows through on its threat to turn your account over to a collections agency. The amount of the decline will largely depend on the rest of your credit history, but even a relatively modest decrease could knock your score down to the point at which you'll have to pay a higher rate for your new mortgage.

Most lenders today use the FICO credit-scoring system, which was developed several years ago by California-based Fair Isaac Corp. Under FICO's latest scoring formula, collection accounts under $100 won't hurt a consumer's score, but the $1,625 that the auto dealer claims you owe is obviously far above that amount.

Your best option now would be to pay the $1,625, but attach a certified letter to the check stating that the payment is being made under protest. This should prevent the account from going to collections, protect your credit rating and thus allow you to obtain the lowest rate policy when you apply for a mortgage. You can then sue the car dealer in small claims court to have the money returned, plus reimbursement for any court costs or legal fees that you incur.

The IRS is busy adding 3,411 employees to its workforce before a September 30 deadline, with a similarly sized hiring campaign to follow in 2010. The recruitment push coincides, however, with a worsening shortage of IRS-owned office space, according to a report released August 17 by the Treasury Inspector General for Tax Administration. The IRS has said it plans to open its telework program to more employees. But whether that is practical divides the observers interviewed by Tax Analysts.

"Telework was recognized by a lot of [IRS] managers as the future of the working environment, but the question was, how much more and how fast?" said Thomas Petska, who until his retirement in May was director of the IRS's Statistics of Income Division.

National Treasury Employees Union President Colleen M. Kelley thinks the IRS should do more. "The NTEU has been pressing the IRS to expand telework, but some managers are resistant to change," she said. "Too often, managers think that because they cannot see the employee, the employee is not working."

The movement toward telecommuting -- which helps ease traffic congestion and reduce employee conflicts between work and home responsibilities -- has been embraced by Congress as a way to improve recruitment and retention of federal workers. The 2000 transportation and related agencies appropriations bill established a policy framework to allow federal workers to telecommute "to the maximum extent possible without diminished employee performance." Additional congressional directives are agency-specific.

But only about 4 percent of the IRS's nearly 82,000 employees took advantage of the telecommuting program at least one day per month in 2007, according to the Office of Personnel Management's 2008 annual report on teleworking. That contrasts with a governmentwide average of 7.6 percent.

IRS managers have discretion in whether to grant telework privileges to employees. (For the TIGTA report on office space, see Doc 2009-18562 or 2009 TNT 157-12.) Whether the Service's lower telecommuting rate is a product of cultural resistance to change or part of the need to safeguard confidential information depends on who is asked. An IRS employee who spoke on condition of anonymity said that while there are some willing managers, many IRS supervisors resist change largely because they are accustomed to managing employees in person.

Telecommuting's Trade-Offs

Supporters of telecommuting point to its proven track record. "Studies and our real-life experience have shown that employees who telework are just as productive if not more productive than employees in the office because of the elimination of the commute time," said Kelley. The telework program "helps the IRS run more efficiently by boosting the morale and productivity of employees, who can spend time working instead of on the roads," she said.

But there's a downside. While an individual's performance may not suffer from teleworking, having too many employees on variable schedules can affect work-group efficiency, Petska said. "You want to have a core group of people in the office to handle sudden needs. You also want to have a core team in the office to work together on projects," he added, noting that many IRS projects involve teams and that having some members off-site can complicate communication when the teams are large.

Petska noted that the IRS already has a flexible schedule program that lets employees work 9 or 10 hours on some days to earn additional days off each pay period. Alternatively, many employees are allowed to start their regular eight-hour day as early as 6 a.m. or as late as 9:30 a.m. For the SOI Division, which may receive an urgent data request with no warning, those flexible schedules, "combined with the alternative workdays, leave, and training, cut down on the number of staff in the office available to convene meetings of project teams and to work on unplanned needs," Petska said.

Another obstacle may be the need for portable equipment. Historically, Petska said, the IRS purchased desktop computers for its employees on the assumption that they have more computing power and generally need fewer repairs than laptops. While employees can request a laptop if their desktop model is slated to be replaced, he said, the IRS is not in a position to replace a large quantity of still-usable desktops given the more pressing demands on its resources.

Another concern is that legally protected confidential data may be compromised if employees work on files from home. But Petska pointed out that data security measures are in place to accommodate teleworker connections to the IRS and that employees working off-site connect to encrypted secure servers through the Enterprise Remote Access Program.

Eligible employees may take their IRS laptops off-site, but no private data are stored on those computers. And IRS employees are not allowed to physically remove any documents or files from IRS premises that may contain private taxpayer information, Petska said.

Kelley said that even though security concerns render some job functions ineligible for teleworking, her union has been pressing to make the privilege available to a wider range of IRS job categories, including revenue officers, computer auditors, estate and gift tax attorneys, engineers, appraisers, economists, appeals officers, auditors, and some fuel compliance officers, tax specialists, and revenue agents.

"There are many cases when it is critical that the IRS have the ability for a large number of employees to telework -- the flooding of the IRS headquarters building [in 2006] is one; the potential for a pandemic is another example," she said, adding that cost may be a factor in why the IRS has not provided employees with laptops and other equipment "at the pace and level necessary to expand telework more quickly."

TIGTA Shows the Way?

It is ironic that TIGTA, the organization charged with auditing the IRS's performance, has itself operated one of the federal government's most successful telecommuting programs. TIGTA was recognized by OPM in its report on telecommuting as a "standout" organization whose example offers agencies and other organizations best practices and strategies to shape their own telework programs.

Joe Hungate, TIGTA's principal deputy inspector general, said a viable telework program requires first and foremost "executive support and wherewithal" to make the culture change. "One of the biggest challenges we had to overcome was managers refusing to let go and manage by performance rather than by presence," he said.

His boss agreed. "I have to acknowledge that when I first learned about the telework policies in existence at TIGTA, I was a little uncomfortable," TIGTA Inspector General J. Russell George said, adding that he came over from Capitol Hill, an environment in which telecommuting is minimal.

But George said he made it a priority to educate himself about TIGTA's existing telework program. Seeing telecommuters' "top-notch" work product, along with improved worker morale, allayed his concerns, he said. George said he then embraced the program and took it a step further by implementing a flexible work hours schedule.

Larry Koskinen, TIGTA's associate inspector general for mission support, said that to change its culture, TIGTA first had to put into place specific policies and performance metrics to structure telework agreements and manage performance. "Policy formalization really drives adoption," Koskinen said.

TIGTA sponsored a meeting in 2003 that brought together all of its 100-plus management personnel for instruction in how to manage in a virtual environment, according to Koskinen. Speakers helped the managers refine how they communicated their expectations and goals. The effort led to widespread participation in the program -- of TIGTA's 800 employees, 38 percent telework at least three days per week, and 92 percent telework at least one day per month, Koskinen said.

Another reservation initially expressed by some managers, including George, was that worker productivity would drop without direct supervision. George said that when he investigated, he found the opposite -- that the work produced by teleworkers was as good as, or better than, that produced by employees who spent all their time in the office.

TIGTA has embraced digital interfaces for its employee project team, Hungate added, and the ability of team members to connect digitally has allowed TIGTA the freedom to reach into its remotest offices to pull in whatever staff expertise a project requires.

Not all employees telecommute well. George acknowledged that telecommuting employees can deceive their managers as to how many hours they're working, but he said those instances were "rare" and that he could recall only one instance of an employee having teleworking privileges revoked.

Those isolated cases, George added, are outweighed by the tremendous value of the program to employee morale and the willingness and desire of new hires to work at TIGTA.

"The higher we push telework, the higher our productivity," said Hungate, adding that most teleworkers are "so mindful of the fact that they need to project their work into the workplace that they push themselves to work harder than they would if they were in the office."

"The real problem is managing burnout," he said. "We've begun to hear our first complaints that people are almost working too hard and they can't shut off at the end of the workday."

Security and logistical concerns mean some functions must always be performed in-house, "but for the auditors, investigators, and evaluators, the program works extraordinarily well," according to George.

TIGTA uses encrypted networks and "carefully deployed commercial technology," Koskinen said, and it spent less than $ 100,000 to outfit all its teleworkers with hardware and software that connect and work securely, including laptops, webcams, all-in-one printer-scanners, and cellphones.

Multiple Benefits

TIGTA's telework program also delivers ancillary benefits. "The telework program has been a great asset for hiring," said Hungate. "We get some great talent at the door because new hires know that they can have some discretion and maintain a good work-life balance at the organization."

The program "made it possible for us to rethink the nature of telework," Hungate added. "It's not just that we can now work from home; we can now work from anywhere -- we can quickly and easily put together a team from personnel in any of our 70 different locations. Our organization is much nimbler."

Admittedly, TIGTA was able to develop its telecommuting program while dealing with just 800 employees, while the IRS must consider the needs of more than 80,000.

In response to Tax Analysts' inquiry, an IRS spokesman released this statement: "About 27 percent of IRS workers have been approved for telecommuting. A recently negotiated agreement with NTEU expanded the type of positions eligible to telecommute. Those eligible include certain revenue officers, compliance officers, economists, program analysts, etc. Employees and managers who participate view the program favorably."

A former IRS official was sentenced to 24 months in prison for his role with a Topeka-based tax company that marketed what authorities described as bogus tax deductions.

Jesse Ayala Cota, 68, of Buena Vista, Calif., had pleaded guilty in April 2007 in federal court in Kansas to one count of conspiracy to defraud the Internal Revenue Service.

Cota, a 33-year veteran of the IRS who rose to become a district director, went to work for Renaissance, the Tax People Inc., in July 1999 after retiring from the IRS. At his guilty plea hearing, he admitted counseling taxpayers on how to defraud the government using methods devised by Renaissance.

Prosecutors contended that Renaissance falsely claimed customers could convert personal expenses, including children’s allowances, educational costs and vacations, into tax-deductible business expenses. Cota and other defendants allegedly assured Renaissance customers that the deductions were legal.

Eight other defendants have been convicted for their roles in the scheme, including Renaissance founder and president Michael Craig Cooper, who is scheduled to be sentenced in November.

Six of the defendants have received sentences ranging from two years of probation to 46 months in prison.

A former IRS compliance officer in Las Vegas has pleaded guilty to accepting a bribe in exchange for preparing a false audit report for a taxpayer.

Fernando Cruz, 43, now of Shady Grove, Ore., pleaded guilty Wednesday to one count of a public official accepting a gratuity. He is scheduled for sentencing at 10 a.m. Nov. 24, said U.S. Attorney Greg Brower of Nevada.

In 2008, Cruz was working as a tax compliance officer for the IRS in Las Vegas. IRS employees are prohibited from preparing tax returns for compensation, gifts or favors and are required to report any attempted bribes to the IRS, Brower said.

In May 2008, Cruz was assigned to audit the individual joint tax return of a Las Vegas couple. At the first meeting with the couple at the IRS office, Cruz provided his personal cell phone number to the woman and told her to call him if she ever had tax questions or wanted him to prepare their taxes.

The couple told their accountant about Cruz's offer, and then reported it to the Tax Inspector General for Tax Administration. The couple also agreed to work with investigators and to have monitored calls and meetings with Cruz.

Cruz went to the couple's home on June 14, 2008 and reviewed the couple's tax records. He told the woman he could "fudge" their tax records so they would have less tax liability.

Cruz coaxed the woman on how to answer questions during an upcoming audit appointment she had with him on June 24, 2008, specifically instructing her to say that she did not have receipts to verify expenses.

Cruz also accepted $500 in cash from the woman and was told that he would receive another $500 if he could make their tax liability go away.

The woman met with Cruz as scheduled at his IRS office. Cruz prepared an IRS income form with the false information she provided. Cruz also mentioned that the woman could help him find an apartment in exchange for his help to the couple on their audit.

Both meetings were electronically monitored.

The maximum sentence that could be imposed against Cruz is two years of imprisonment and a fine of $250,000. He has been released on a personal recognizance bond.

The case is being prosecuted by Assistant U.S. Attorney Nicholas D. Dickinson.

New Orleans Times Picayune , August 28, 2009 , By Jaquetta White Business writer

The Internal Revenue Service is auditing $300 million of special tax bonds issued in 2003 by the Ernest N. Morial-New Orleans Exhibition Hall Authority, the board that oversees operation of the Ernest N. Morial Convention Center-New Orleans.

The board disclosed the random audit in a resolution to hire counsel to represent it in matters dealing with the IRS.

IRS spokeswoman Deirdre Harris said she was unable to comment on the audit because of federal disclosure regulations and federal law.

According to its Web site, the IRS routinely conducts tax probes, or random audits, of individual taxpayers as well as business operations even when there is no reason to suspect them of wrongdoing.

The board received the notice of the audit June 21, said Susan Weeks, an attorney with Foley & Judell LLP, which acts as bond counsel for the center's board. The center is in the process of turning over requested documents, Weeks said.

The bonds were issued in 2003 to finance the Phase IV expansion of the convention center, a plan that had called for expanding the riverfront facility by about half. The long-delayed project was scrapped in 2007 and the bonds "defeased," meaning that the $300,470,000 collected in the bond sale was placed into an escrow account. The money is being set aside to retire the outstanding debt when it comes due in 2013.

What had been the planned as the site of Phase IV expansion, a 26-acre space on Henderson Street at the end of Convention Center Boulevard, recently has been dubbed FestivalPark at the Convention Center. It will be used to host festivals, concerts and other activities. The space was used for the Louisiana Tailgate and BBQ Festival last weekend and will host the Project 3090 Music Festival on Sept. 5.

OTTAWA — The U.S. tax authorities have thrown a huge curve ball at Nortel creditors by submitting a $3-billion U.S. claim for back taxes, interest and other penalties.

If U.S. bankruptcy judge Kevin Gross accepts all or most of the claim as valid, “it will deplete whatever is available to other creditors,” says Tony Marsh, the spokesman for Nortel retirees. “That’s a pretty scary number.”

If Nortel completes the sale of its global assets as planned, it is expected to have little more than $5 billion (all figures U.S.) in cash to distribute. This is to be applied against more than $10 billion worth of claims arising from creditors in Canada, the U.S., Britain and many other jurisdictions. Claimants — from company suppliers to pensioners — would receive roughly 50 cents on the dollar.

However, if the new demand from the U.S.Internal Revenue Service is added, then the settlement ratio would tumble to less than 40 cents on the dollar.

The timing of the claim is no coincidence. It showed up this week on the website of Epiq Bankruptcy Solutions — the company administering the U.S. portion of the bankruptcy proceedings — in advance of the Sept. 30 deadline for filing claims.

To date, the IRS claim dwarfs all others. Although it applies to Nortel’s U.S. unit, Nortel Networks Inc., its impact may be larger.

Since tax claims often receive priority in a bankruptcy proceeding, this raises the possibility of wiping out a majority of the claims from U.S. bondholders, suppliers and employees owed severance pay.

This, in turn, will intensify the pressure for U.S. claimants to prevent further transfers of cash from Nortel’s U.S. operations to Canada.

Under Nortel’s complicated global structure, the company shifts money from cash-rich regions such as the U.S. (where revenues from the sale of products generally exceed expenses) to jurisdictions like Canada — which does a lot of expensive R&D, but generates relatively few revenues for the company.

Canadian creditors had been concerned that Nortel Canada’s low cash balances will translate into a claims settlement ratio as low as 12 cents on the dollar. Under this scenario, U.S. and British claimants would receive 45 cents on the dollar.

The IRS move would decimate the U.S. claims while doing nothing to improve the situation for Canadian creditors.

The big question is, why is the IRS pressing for such a large claim? The IRS declined to comment, citing privacy concerns.

Tax lawyers contacted by the Citizen were puzzled by the size of the IRS claim, not least because Nortel has lost money nearly every year for a decade and should, therefore, have no need to pay income taxes.

An examination of the U.S. tax agency’s first claim in the Nortel bankruptcy, submitted early this year, offers some clues, but no real explanation.

For instance, nearly all of the initial $15-million claim was for payroll taxes related to social security. Since Nortel has little more than 10,000 employees in the U.S., and has almost certainly been paying payroll taxes on time for many years, it seems clear this is not the issue that prompted the second, much higher, IRS claim.

The first IRS document also lists nominal amounts owing for corporate income tax going back to 1998, along with the notation “pending examination.” This could mean the IRS’s Nortel file has a very long time horizon.

It’s possible the IRS may be challenging an aspect of the transfer pricing system used by Nortel when shifting resources from one company unit to another.

However, lawyers suggested that since the system has been in place for many years, presumably with input from tax authorities along the way, this seems an unlikely target for the IRS — unless there has been a recent tax ruling the tax agency is now seeking to apply retroactively.

Certainly the IRS has not been shy about asserting its power. In a well-publicized case involving the U.S. unit of British pharmaceutical giant GlaxoSmithKline, the IRS is seeking nearly $2 billion in back taxes.

The IRS is challenging GSK’s use of financing arrangements between its U.S. and other company units. The IRS reclassified some intercompany financing from debt to equity. Accordingly, the tax authority characterized the amounts paid as dividends subject to withholding tax. The issue arose from IRS audits covering the years 2001 to 2008.

GSK last August challenged the IRS’s interpretation in the U.S. tax court, where a decision is not expected before 2011, according to a recent securities filing.

Nortel on Wednesday was unable to respond to a request about potential tax issues.

In another current case, the IRS filed court papers early this year in support of a $12.5-billion claim for back taxes against Washington Mutual Inc.

The Seattle-based bank said it would seek a refund on previous years’ tax bills by applying last year’s massive losses — a move the IRS is expected to resist.

Nortel is no stranger to tax-based assets of this sort. The Canadian firm had $3.1 billion worth of tax loss carry forward on its books at the end of March — assets that could have been used to reduce taxes on future earnings. About $1.2 billion of the total applied to Nortel Canada, with $713 million available for Nortel Networks Inc., the U.S. unit.

Nortel also carried $1.2 billion worth of R&D tax credits on its books, including $400 million tied to U.S. activity and $800 million to Canadian research efforts. Again, Nortel can apply these assets only in the event it is profitable — an event considered so improbable, the company has listed the net value of the R&D credits as next to zero.

IRS claims are often disputed, then lowered by bankruptcy judges. But the extent of the reductions depends heavily on the facts.

Until the IRS offers details of its claim, its decision to go after a large chunk of Nortel’s assets has merely served to give thousands of creditors even more reason to worry about their settlements.

The Star-Ledger , August 28, 2009 , By The Star-Ledger Editorial Board

For a select breed of upper-bracket Americans, it has been one of their inalienable rights, along with life, liberty and the pursuit of obscene wealth. We're talking about the right to beat the tax man by stashing your cash in secret, numbered foreign bank accounts.

Maybe not much longer, however. According to a deal Washington has struck with Swiss authorities, the names of some 4,450 American tax-dodgers with secret accounts in UBS, the Swiss banking colossus, will be handed over to the U.S. Internal Revenue Service.

The prize is a big one. The 4,450 accounts are believed to have contained and concealed some $18 billion at one point. And there's more where that comes from. Washington is demanding UBS cough up the names of some 52,000 Americans playing hide-and-seek with the tax man. This could be the IRS equivalent of hitting a Mega Millions jackpot.

"Wealthy Americans who have hidden their money off shore will find themselves in a bind," said IRSCommissioner Douglas Shulman. Or, as Ron Geffner, a one-time enforcement officer at the Securities and Exchange Commission, put it to the Washington Post, "It's clear that the concept of a perpetually safe tax haven is a fantasy that no longer exists."

"Is nothing sacred anymore?" a career tax cheat might ask.

Washington has labored for years to pierce the veil of foreign bank secrecy, usually in vain. Why it has succeeded now isn't clear, but it is known that Washington put unprecedented pressure on UBS and on the Swiss government in recent months.

In February, UBS, to avoid criminal prosecution, agreed to pay Washington $780 million and admit it had helped defraud the U.S. government by coaching American citizens in ways to hide taxable income. Last week Washington tightened the screws by indicting a Swiss private bank executive and tax lawyer on charges of selling tax evasion schemes designed to defraud the IRS.

For the moment, the focus is on Switzerland, because of its reputation as a global power in the world of secret banking accounts. Negotiations are under way to compel other, smaller, Swiss banks to reveal the names and secret accounts of their American clients. But the pursuit of the serial tax cheat is not likely to end there. It seems only a matter of time before other tax havens, particularly those in the Caribbean, are brought under Justice Department and IRS scrutiny.

Meanwhile, those Americans who've gotten away with squirreling away income in UBS and other foreign tax-cheat havens are being given a chance to clear their consciences and their tax records. They have until Sept. 23 to 'fess up about all the dollars they've tucked away, in exchange for reduced penalties.

And what if they don't? It's a crapshoot. Maybe they'll get away with it. And Washington hasn't yet spelled out the penalty for getting caught with closeted cash abroad. But it's a good bet it won't be just six Hail Marys and six Our Fathers.

RENO, Nev., Aug. 27 John Gage was reelected president of the American Federation of Government Employees, the largest federal employee union, at its convention here this week. He learned about union organizing growing up in a steelworker family in Pittsburgh, and he played with the Baltimore Orioles before becoming a disability examiner at the Baltimore headquarters of the Social Security Administration in 1973.

He joined the union and soon become editor of the local's newspaper. Gage was elected president of the local, the union's largest, in 1980 and was first elected national president in 2003. Gage, 62, still lives in Baltimore and commutes to AFGE's national office in downtown Washington. He takes pride in helping AFGE grow from what he said were 191,000 members in 2000 to 243,000 today, including 30,000 who joined in the past three years.

He talked with the Federal Diary as he began his third term Thursday. The conversation quickly turned to the Obama administration's performance. He's a big fan of President Obama and considers him the nation's "most pro-worker president."

"I think he really respects working people," Gage said. "It just oozes from him, that sense of dignity and respect that he gives working people and the labor movement."

But the rookie president does not get perfect grades from the veteran union organizer.

Gage dings administration officials for being taken in by what he calls the "bumper sticker" notion of "pay-for-performance." He acknowledges that paying workers for how well they perform sounds good, but he says pay-for-performance can also be used as a spigot to turn off raises for federal employees.

"We are hellbent to get rid of that," he said, even though few of his members are subject to such a policy. In a speech this week, Gage said "even our friends who may be taken in by the phrase must feel our wrath."

Sure enough, when he heard Peter Orszag, director of the Office of Management and Budget, use the words, he said, "I was in his office the next day, really."

Many administration officials, though not necessarily Orszag, he said, don't "have a good idea of what pay-for-performance is. . . . We have made a very strong request to the Obama administration not to use the term 'pay for performance,' and since then they have been doing that."

Gage and other federal union leaders also were not happy when Obama's budget called for civilian workers to get a lower percentage pay hike than members of the military. That "hurt an ally, us," he said.

But Obama's "pretty wonderful" efforts to limit the amount of work contracted out to private companies and the number of "really great" people he has appointed to various positions earns him "a real solid B" from Gage.

The administration also will get major union points when it grants transportation security officers -- the airport screeners who make you take off your shoes and peer into your baggage -- the right to collective bargaining. Gage said the Obama team has been "a little slow" on getting a Transportation Security Administration boss in place, but he expects the bargaining-rights decision to be made before the end of the year.

"We're on a fast track toward the biggest representation election in the history of the federal government," he wrote in prepared text for a speech to his union on Monday. "We're ready and we're in it to win it."

The other major federal workers organization begs to differ.

National Treasury Employees Union President Colleen M. Kelley, also a Pittsburgh-bred labor leader, said she is "confident NTEU will represent [TSA] employees better and more effectively than AFGE. When CBP [Customs and Border Protection] employees were given a choice, they chose NTEU."

Gage and Kelley are often found side by side at congressional hearings and conferences, advocating very similar positions regarding the federal workforce. But the looming battle for the member-rich TSA turf is driving a wedge between the two unions.

"Our relationship already has cooled because of this" Gage said. "It's hard to go into an election like this and be as arm-in-arm, as perhaps we once were." But he described the two groups as "natural allies" and hopes the relationship will again be a close one after the TSA representation election.

Gage works hard to maintain a strong relationship with unions in the AFL-CIO, of which NTEU is not a member. So they cooperate in labor's push for health-care reform along the lines backed by Obama. Gage doesn't want to see an Obama administration crippled by a health-care defeat.

"If the president fails on health-care reform, then our agenda could be hurt," Gage said.

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